What is Asset Based Lending | How it Works

For business people reading this post we congratulate you. It actually is important to know the essentials of asset based lending. Asset Based Lending is a type of revolving commercial financing that permits a business to borrower against a discounted value of their assets. Asset based lenders concentrate on the worth of the collateral during the underwriting process a lot more than the credit history of your organization.


Asset based loans
typically have several different collateral pools and advance rates as part of the structure.
Below are the basics of an asset based loan:
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Pricing
Because Asset based lending is applied for businesses with revenue from $1,000,000 to well over a Billion, pricing differs greatly. Large, strong borrowers can borrow at close to commercial paper rates but most asset based loans are created to companies with revenue less than $100,000,000. The “all in rate” for these loans is typically between LIBOR + 8% and LIBOR Plus 20%. Rate depends on the size of the loan and the financial strength of the borrower.


Structure
Accounts Receivable –
Average advance rates between 80% and 90%. Most asset based loans have got the majority of the loans towards the accounts receivable.

Inventory – Traditional advance rates between 35% and 65%. Advance rates depend on the salability of the inventory in a liquidation. The more specialized the inventory, the low the advance rate

Machinery and Equipment – Advance rates for asset based loans are typically 60% of the orderly liquidation value. A large amount of lenders will require the Machinery and Equipment to be reappraised every year.

Real Estate – Advance rates are ordinarily 50% of the appraised value.
Asset based loans
characteristically demand the borrower to revalue the assets whenever they take an advance. This is often made by submitting what’s called a “borrowing base” to the asset based lender which is quite simply a spreadsheet that gives the current value of the assets. Since the value of accounts receivable and inventory change often, the borrowing base calculations focus on these assets.
For the most part asset based lenders require a personal guaranty from the majority owners of the business.

Typical asset based loans require that all customers of the borrower remit payment for invoices to a lockbox controlled by the lender.

All asset based loans have loan covenants. These may very well be very restricted financial covenants depending on the cash flow and balance sheet of the organization.

Underwriting
Underwriting an asset based loan can take between 30 and 60 days. The lender will quite often send a field examiner into the business to examin the books and records. Be expecting to have most of your assets appraised. The cost of the due diligence will be the responsibility of the borrower. Which include legal costs it is not unusual for the total expenses to exceed $100,000 and could be as much as $1,000,000.

At NeeBo Capital we focus on lending against accounts receivable to companies with revenue less than $10,000,000. We don’t charge our clients for due diligence and because we only lend against accounts receivable the entire process is generally done in under a week.
Our system is completely electronic so we are able to keep overhead down and pass that cost savings along to our clients by eliminating line fees, wire fees and monthly maintenance fees. With NeeBo Capital you only pay for what you use.
For more information about our electronic, online financing program please click the button below.

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Chris Lanchech

Hi everyone, my name is Chris and I am a junior analyst at Neebo Capital and an inspiring blogger. We enjoy speaking with business owners and entrepreneurs who come to Neebo Capital looking for cash flow solutions. Give us a call toll free at 1-888-382-3766 or Visit us online at www.neebocapital.com

4 thoughts on “What is Asset Based Lending | How it Works”

  1. It is very hard to find familiar persons on that matter, however you seem like you know exactly what you are talking about! Cheers

    1. Construction projects for sub tdaers can be risky. Many sub-contractors will bid jobs knowing that they will lose money but want the work and want to keep their employees working. Other times, it can be inaccurate estimating that can cause a loss or worse yet rework that must be completed due to a quality issue. Late payments by general contractors is another risk and can put a squeeze on cash flow.Having a source for capital, such as invoice factoring, can be a safety valve when problems occur. The ability to obtain cash quickly and easily can make a big difference in the operation of the business.

  2. The interest from a pay day loan is aiooctrus. Definitely a last resort. For an amount that small, I would try a close friend or a relative. And then pay it back the very first thing. Asking a new employer about an advance is probably going to raise a bunch of warning flags on their part unless the new employer is related to you (as in your uncle or aunt, etc.).Perhaps your mother who’s tardy paying your credit cards on time could help out as well. You could also try a site like but I’m not sure if you’re below their minimum amount. What’s you’re going to want to do when you start your new job is to set aside money for times like this in your future.

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